Q2 2024 Shopify Inc Earnings Call
Carrie Gillard: Good morning, and thank you for joining Shopify's second quarter 2024 conference call. I am Carrie Gillard, Director of Investor Relations, and joining us today are Harley Finkelstein, Shopify's President, and Jeff Hoffmeister, our CFO . After their prepared remarks, we will open it up for your questions.
Unknown Executive: Good morning everyone, and thank you for joining us. We cannot wait to walk you through all the outstanding results from the last quarter. Our relentless focus on our mission has not only empowered our merchants but has also strengthened Shopify significantly. We are at our strongest yet, and we could not be more excited about the future of commerce and the future of Shopify. So first, let's break it down at a high level.
Unknown Executive: In Q2, we saw 25% revenue growth when excluding logistics, with gross profit growing faster than revenue. Operating expenses decreased quarter over quarter, and our free cash flow margin more than doubled to 16% from last year. A couple of other highlights from Q2 were the release of our latest editions at the end of June, with over 150 new product updates and features. And passing a massive milestone as we cross the $1 trillion mark for cumulative GMV that has been processed through Shopify.
Jeff Hoffmeister: So first, let's break it down at a high level. In Q2, we saw 25% revenue growth when excluding logistics, with gross profit growing faster than revenue. Operating expenses decreased quarter over quarter, and our free cash flow margin more than doubled to 16% from last year.
Speaker Change: Passing a massive milestone as we crossed the $1 trillion mark for cumulative GMV that has been processed through Shopify. And, our offline business surpassed $100 billion in cumulative GMV.
Unknown Executive: And our offline business surpassed $100 billion in cumulative GMV. These results reiterate what we've been saying all along; we are building for the long term, and our business model is working. As you may have seen in our recent edition, unification was the central theme. So what do we mean by that?
Jeff Hoffmeister: These results reiterate what we've been saying all along, we are building for the long term and our business model is working.
Unknown Executive: Well, we believe that the mark of great software is that as it scales and grows, each new feature is built as if it were there from the very beginning. Everything works together harmoniously, crafted in consistent style and quality. This is a key value proposition for Shopify and something that, as we have evolved from an online store to a comprehensive unified operating system for commerce anywhere, anytime, is becoming increasingly important. Whether online or offline, direct-to-consumer or B2B, domestic or global, Shopify captures it all.
Unknown Executive: What makes Shopify so powerful is how seamlessly all parts of the product work together, reducing complexity at every stage of a merchant's journey. We understand that starting a business is hard, and expanding into new markets adds even more complexity.
Jeff Hoffmeister: We understand that starting a business is hard, and expanding into new markets adds even more complexity. As our merchants grow, Shopify tackles these challenges so they don't have to.
Unknown Executive: As our merchants grow, Shopify tackles these challenges so they don't have to. So one of the coolest things that we rolled out at this edition was markets. What used to be called markets and markets pro are now streamlined into cross-border products, international selling, and managed markets, respectively. This means our merchants no longer have to worry about juggling multiple stores or wrestling with new workflows. So we are taking advantage of this by continuing to roll out targeted marketing initiatives that target our point-of-sale offering.
Speaker Change: You set up a new market, you tweak it to your liking, and boom, you are good to go.
Speaker Change: No other platform on the planet offers merchants the opportunity to expand their reach at this scale, this speed, this efficiently, with this level of seamless integration and control. All out of the box.
Speaker Change: Okay, now let's dive into how we're fueling merchant growth across offline, B2B, international, and the shop app. Let's start with our offline business.
Speaker Change: Offline commerce is still a huge deal for us.
Speaker Change: So we are taking advantage of this by continuing to roll out targeted marketing initiatives that target our point-of-sale offering.
Speaker Change: We're introducing the features they care about most, like improving operating efficiency such as the new remote smart grid layout editor, omni-channel return rules, and the ability to stack multiple discounts at checkout, which makes it easier for merchants to customize their promotional strategies.
Speaker Change: Just as we've streamlined operations for S&B retailers, we are now removing barriers for global, omni-channel businesses on Shopify.
Speaker Change: Our B2B offering also saw a 6x increase in online orders compared to last year, underscoring the value of self-serve B2B purchasing.
Unknown Executive: We're making our B2B offering even more competitive with features like Deposit Set Checkout and Manual Payment Method. This functionality, combined with our modern approach and unified back-end, makes it easier for merchants to manage and track their business seamlessly across channels. For example, take well-known baby apparel company Caden Lane.
Speaker Change: This functionality, combined with our modern approach and unified back-end, makes it easier for merchants to manage and track their business seamlessly across channels.
Speaker Change: Plus, we've seen a 34% increase in the number of merchants getting B2B orders on Shopify compared to last year. This is something that many large brands have been searching for, and is yet another example of the work we are doing to drive our leadership position in unified commerce.
Speaker Change: So, how do we know that we're hitting the mark? Well, brands like home fragrance company Pura and skincare brand Dermalogica have recently adopted B2B and is attracting new brands like Progress Lighting and Therabody, who recently signed up to join Shopify because they're attracted by the ability to manage all their channels from a single admin.
Speaker Change: Ultimately, B2B is a great example of how we're expanding our total addressable market.
Speaker Change: So, just like when they branch out into social channels or B2B, they have to think about everything from pricing and localization to availability and merchandising, all tailored for the end consumer.
Speaker Change: And that is why we've made it super easy to sell globally right from the start. With our new markets feature, merchants can expand wherever they want and customize what they need really effortlessly.
Unknown Executive: After signing up for Managed Markets, Caden Lane experienced a 692% year-over-year growth in international sales. Both of these merchants signed up for managed markets and are very quickly reaping the benefits. All of which will drive higher GMV and GPV, boost merchant adoption, and ultimately strengthen our ecosystem. Thousands of top consumer brands have joined in, leveraging ShopCash and ShopCampaigns to draw in new buyers. This led to over 10,000 merchants posting their best GMV week ever on the Shop app, showcasing the solid progress we're making in helping merchants strengthen and expand their customer relationships.
Speaker Change: or wine glassware merchant Glassvin, which experienced 71 percent international sales growth and over a hundred percent boost in conversion to sales in Canada and Australia. Both of these merchants signed up for managed markets and are very quickly reaping the benefits.
Speaker Change: So, we've added support for UPS in managed markets in Q2, which makes it even easier for merchants to get great expedited shipping rates to their international buyers.
Speaker Change: In Q2, Shopify payments penetration was 61%, and ShopPay facilitated $16 billion in GMV, up 45% from last year.
Speaker Change: We see significant growth potential for payments through international expansion, enterprise, and increasing activity in offline and B2B channels. All of which will drive higher GMV and GPV, boost merchant adoption, and ultimately strengthen our ecosystem.
Speaker Change: Recognized as the world's best converting accelerator checkout, ShopPay is not just boosting inversion rates across our merchant stores. Time and time again, it's a major draw for enterprise brands considering Shopify.
Speaker Change: Our conversion rate enabled by these products is absolutely a key differentiator that helps Shopify close the deal time and time again.
Speaker Change: Now beyond the ways we are helping our merchants grow which in turn fuels our own growth, let me quickly touch on the great progress we are making across two other growth strategies for Shopify, International and Enterprise.
Speaker Change: Our international GMV growth continues to outpace North America, up 27% from last year, driven by two main goals.
Unknown Executive: In Q2, we rolled out our Point of Sale Terminal to 8 additional countries, contributing to an impressive 2.4x increase in GMV through our Point of Sale Terminal compared to Q1. Brands like Shopping Channel, QVC, Bookseller, Barnes & Nobel, Luggage Brand, Away, Golf Apparel Brand, Travis Matthews, Trading Card Company, Topps, Designer Footwear Line, Vince Kimuto, and Mattress Manufacturer, Casper.
Speaker Change: Every market-specific product feature we launch enhances our competitiveness and helps merchants succeed locally. This relentless commitment to helping merchants start and grow in all facets of their business ultimately brings more merchants into Shopify, fueling our flywheel and extending our ability to make commerce better for everyone.
Speaker Change: Now, within the enterprise opportunity, our flexibility, our speed, and our value is strongly resonating with larger, high-volume brands, and they continue to flock to Shopify. We sign new deals across a diverse set of verticals, industries, and geographies.
Speaker Change: Brands like Shopping Channel, QVC, Bookseller, Barnes & Noble, Luggage Brand, Away, Golf Apparel Brand, Travis Matthews, Trading Card Company, Topps, Designer Footwear Line, Vince Camuto, and Mattress Manufacturer, Casper.
Speaker Change: Combined with our growing partner ecosystem, including a new partnership that we announced with Oracle in the quarter, these wins not only validate our strategy, but also convey our ability to cater to the unique needs of the biggest brands on the planet.
Speaker Change: Now, looking at our marketing strategy for this year, you can see that we are all in. It's about leading confidently, leveraging our strength, and continually adapting to stay ahead of the game.
Unknown Executive: But here's where we truly excel, data-driven decision-making. We relentlessly test and optimize every single channel, keeping well within our average 18-month guardrail. Our tools and our AI models are crafted not just to operate, but to excel, leveraging emerging technologies to enhance our feedback loops. At the same time, we scaled back on other channels, focusing on further testing and experimentation to uncover new high-return opportunities.
Speaker Change: We relentlessly test and optimize every single channel, keeping well within our average 18-month guardrail.
Speaker Change: Our tools and our AI models are crafted not just to operate, but to excel, leveraging emerging technologies to enhance our feedback loops.
Speaker Change: These tools provide sharper, more iterative feedback, enable more precise analysis, and deliver quicker signals, letting us identify patterns faster than ever, so we can swiftly adapt and respond.
Speaker Change: At the same time, we scaled back in other channels, focusing on further testing and experimentation to uncover new high-return opportunities.
Speaker Change: Now, for the back half of 2024, we will continue with this playbook, testing, exploring, and optimizing our core performance marketing within our guardrails.
Unknown Executive: By dynamically allocating resources across all of these channels and growth areas, we believe we can continue to drive our performance from the front and redefine industry standards. Now, before I turn it over to Jeff, I want to briefly share my thoughts on the incredible success of our recent Shopify Summit in Toronto. This annual event brought the entire company together to discuss Shopify's future, to align as a team on our priorities, and to host our Hack Days, which have produced some of our best products over the years. Shopify is rapidly strengthening its position as a leading enabler of global commerce and entrepreneurship.
Speaker Change: By dynamically allocating resources across all of these channels and growth areas, we believe we can continue to drive our performance from the front and redefine industry standards.
Speaker Change: Now before I turn it over to Jeff, I want to briefly share my thoughts on the incredible success of our recent Shopify Summit in Toronto. This annual event brought our entire company together to discuss Shopify's future, to align as a team in our priorities, and to host our hack days, which have produced some of our best products over the years.
Speaker Change: Before I close, I feel I need to make something really clear.
Speaker Change: Shopify is rapidly strengthening its position as a leading enabler of global commerce and entrepreneurship.
Speaker Change: We are investing in sustainable growth and driving profitability for the long term.
Speaker Change: And with that, let me turn the call over to Jeff.
Jeff Hoffmeister: Thank you Harley. Our second quarter was incredibly strong, demonstrating the power of our business model and our ability to execute.
Jeff Hoffmeister: across every metric we delivered. Let's discuss our Q2 results.
Speaker Change: This quarter represents the 5th straight quarter where we have delivered GMV growth in Europe exceeding 30%.
Unknown Executive: Unknown Attendee, Keith Weiss, Gabriela Borges, Tobias Ltke, Bobby Morrison, Glen Coates, We saw solid growth across verticals with robust performance in health and beauty and food and beverage. We also saw solid growth in our largest category, apparel and accessories. Relative to our outlook, revenue came in better than expected, primarily from stronger GMV from plus merchants and outperformance in Europe, notably with the FX headwinds playing out largely as we entered. Those primary contributors were partially offset by the absence of the logistics business and lower non-cash revenue from strategic partners.
Speaker Change: Our strength in Europe was broad-based, with growth in both our larger markets of the UK, Germany, France, Spain, and Italy, as well as EMEA more broadly.
Speaker Change: And the last key driver was Point of Sale, which grew 27% year-over-year.
Speaker Change: We also saw solid growth in our largest category, apparel and accessories.
Speaker Change: Notably, this strength in GMB came against the backdrop of mixed consumer spend. We continue to gain market share in the U.S. e-commerce market and abroad.
Speaker Change: This marks the fifth straight quarter where our revenue growth, excluding logistics, has grown 25% or greater. Our consistency and stability of performance reflect the quality and breadth of our software solutions, the success of our merchant acquisition engine, the breadth of the industries, geographies, and merchant sizes that we serve, and quite simply, our ability to execute.
Speaker Change: For the quarter, the key drivers of our revenue growth were
Speaker Change: The GMV strength I just discussed.
Speaker Change: And as a third key driver, increased payments penetration, which hit 61% for Q2.
Speaker Change: Those primary contributors were partially offset by the absence of the logistics business and lower non-cash revenue from strategic partnerships.
Speaker Change: 41 billion of GMV was processed on Shopify payments in Q2, 30% higher than last year.
Unknown Executive: The penetration rate of Shopify payments as a percentage of GMV was 61% compared to 58% in Q2 of 2023 and Greater Penetration of Shop Pay, which was 39% of GPV in The primary source of the growth was an increase in the number of merchants on our platform.
Speaker Change: The penetration rate of Shopify payments as a percentage of GMV was 61% compared to 58% in Q2 of 2023.
Speaker Change: Several factors powered the quarter's higher gross payment volume, including the strong performance of those merchants utilizing Shopify Payments, an increasing percentage of which are Shopify Plus, more merchants across the globe adopting payments,
Speaker Change: and Greater Penetration of Shop Pay, which was 39% of GPV in the quarter.
Speaker Change: These items were partially upset by the continued strength of our business in Europe , which was a larger percentage of GMV, but where we have a lower GPV penetration than North America.
Unknown Executive: Shortening the paid trial offering on our standard plans from 3 months to 1 month, strong growth internationally, and the work of our marketing initiatives. This growth in the number of merchants was complemented by the change to our pricing plans for standard employees. Two reminders regarding our pricing plan change.
Unknown Executive: As stated on our last call, we are not anticipating as much of a benefit from the pricing change on Plus as we did from the pricing change on our standard plans. The impact of these two pricing changes, though, was a smaller contributor to this quarter's subscription revenue growth versus overall growth in the number of customers. Q2 MRR was $169 million, up 25% year-over-year.
Speaker Change: As stated on our last call, we are not anticipating as much of a benefit from the pricing change on PLUS as we did from the pricing change on our standard plans.
Speaker Change: The impact of these two pricing changes, though, was a smaller contributor to this quarter's subscription revenue growth versus overall growth in the number of merchants.
Unknown Executive: We saw growth both year-over-year and quarter-over-quarter in each of standard plus an offline point of sale. The largest driver for all three segments was the growth in the number of merchants on our platform, with growth internationally being a key component contributing to our growth in our standard, For PlusMRR, the largest driver of the year-over-year increase was the acquisition of Newmark, with a change in plus pricing providing some benefit as, As a reminder, and as we discussed back at our investor day, we consider attach rates and output of platform activity, not an input or metric that drives our growth.
Speaker Change: with growth internationally being a key component contributing to our growth in our standard plans.
Speaker Change: Standard and offline point-of-sale benefited from the shortening of paid trials, which went into effect near the end of the first quarter, and the marketing initiatives that we have discussed.
Speaker Change: For PLUS MRR, the largest driver of the year-over-year increase was the acquisition of new merchants, with the change in PLUS pricing providing some benefit as well.
Speaker Change: In Q2, our attach rate was 3.04%.
Unknown Executive: Our Q2 attach rate was up year over year when excluding logistics. However, on a sequential quarter basis, our attach rate was down slightly as the gains in GPV penetration were offset by lower non-cash revenues from strategic partnerships and lower shipping.
Speaker Change: The key drivers of this increase were the continued gains in GPV penetration and higher subscription revenue offset by lower non-cash revenues from strategic partnerships.
Unknown Executive: Moving to gross profit. Gross profit was $1 billion for the quarter, up 25% year over year, growing faster than our revenue growth. Our Q2 gross margin was 51.1% compared to 49.3% in the prior year. Let's break it down a bit.
Unknown Executive: Gross margin for subscription solutions was 82.8% compared to 80.9% in Q2 of 2023. The increase is primarily driven by pricing changes on standard plans, as well as the impact of merchant growth from the shortened paid trial. Our improvement in gross margin for merchant solutions was primarily due to the absence of logistics.
Speaker Change: Breaking it down a bit more.
Speaker Change: Gross Margin for Merchant Solutions was 39.1% compared to 38.1% in Q2 of 2023.
Unknown Executive: When including the impact of logistics, our merchant solutions gross margin was down year over year, primarily due to lower non-cash revenues from certain partnerships and growth in our lower margin payments. Without this reversal, operating expenses would have been $859 million, or 42% of revenue. Increased marketing. We had a year over year increase in our affiliate partner payouts. And since these payouts happen only upon a new merchant joining, there's a clear sign of adding more merchants to the platform and incremental marketing to support our growing enterprise and point of sale business.
Speaker Change: When including the impact of logistics, our merchant solutions gross margin was down year over year, primarily from lower non-cash revenues from certain partnerships and growth in our lower margin payments business.
Speaker Change: Operating expenses were $804 million for the quarter, which includes a benefit of a reversal of a $55 million litigation accrual that we established in Q3 of 2022.
Speaker Change: Without this reversal, operating expenses would have been $859 million or 42% of revenues.
Speaker Change: Compared to the prior year and excluding one-time items in both periods, Q2 operating expenses were up $41 million, or 5% year-over-year, driven primarily by four items.
Speaker Change: Secondly, our Summit event, which, as a reminder, was our first in-person Summit event since 2018.
Unknown Executive: Higher absolute dollar losses on capital loans and payments losses, simply as a result of higher volumes from both of these growth businesses, and offsetting these were the absence of the logistics. We recognize that a returns-based approach to marketing can cause fluctuations in spending in any given quarter. However, it prioritizes the quality and efficacy of our spend.
Speaker Change: Higher absolute dollar losses on capital loans and payments losses, simply as a result of higher volumes from both of these growth businesses. And offsetting these was the absence of the logistics business.
Speaker Change: Our Q2 operating expenses came in better than expectations, driven primarily by three items.
Speaker Change: First, lower marketing expenses.
Speaker Change: Some marketing related to enterprise was shifted out of Q2 into the second half of the year, stemming largely from one campaign that we decided we will launch towards the end of Q3.
Speaker Change: The second component of better than expected OPEX was lower compensation expense.
Unknown Executive: And thirdly, we executed our extremely successful summit event under budget. It is worth noting that this 5% year-over-year growth in OPEX stands in contrast to the impressive revenue growth over that same period. Moving to operating income, for the quarter, operating income was $241 million, or 12% of revenue, marking our fourth consecutive quarter of operating profit since the sale of our logistics businesses and our headcount reduction in Q2 of last year. Stock base compensation for Q2 was $109 million, and capital expenditures were $7 million for the quarter.
Speaker Change: and thirdly we executed our extremely successful summit event under budget.
Speaker Change: Worth noting that this 5% year-over-year growth in OPEX stands in contrast to the impressive revenue growth over that same period.
Unknown Executive: Q2 free cash flow was $333 million, or 16% of revenue, more than doubling as a percentage of revenue versus our Q2 2023 free cash flow margin of 6%. Discipline growth and headcount, which we have kept essentially flat for five quarters and where we expect we can keep headcount growth well below revenue growth, which allows us to smartly aim the product development work and size the team for maximum impact. One other item to cover before we move to Outlook.
Speaker Change: Q2 free cash flow was $333 million, or 16% of revenue, more than doubling as a percentage of revenue, versus our Q2 2023 free cash flow margin of 6%.
Speaker Change: Discipline growth and headcount which we have kept essentially flat for five quarters and where we expect we can keep headcount growth well below revenue growth.
Speaker Change: Internal use of AI and automation to drive productivity and leveraging and continuing to enhance our internally built GSD and Shopify OS systems which allow us to smartly aim the product development work and size the team for maximum impact and efficiency.
Unknown Executive: Since our last earnings call, we made three small acquisitions. The first acquisition added some enhancements to allow plus merchants to do easier customizations of the checkout process. The second gives mid-market and enterprise merchants greater visibility into their inventory across their multiple stores and channels.
Speaker Change: One other item to cover before we move to Outlook. Since our last earnings call, we made three small acquisitions.
Unknown Executive: The third brings a team that will enhance our abilities to get early stage merchants on platform and ramp the success of their business. All three of these acquisitions were small in terms of dollar amount and in material to our financials, but are important additions to enhancing our merchant, Moreover, these acquisitions bring us some great founders who were specifically drawn here by the quality of our existing Let's now turn to our Q3 outlook, which as a reminder is the first quarter where we will no longer have the impact of the sale logistics on our, First on revenue, we expect Q3 year-over-year revenue growth to grow at a low to mid-twenties percentage rate, driven by the same factors that have contributed to our growth throughout the first half of the year, turning to operating expenses.
Unknown Executive: We expect our gap Q3 operating expenses to be 41 to 42% of revenues, representing a 300 to 400 basis point improvement over Q3 of last year at 45%. As we stated last quarter, we believe considering operating expenses as a percentage of our revenue, especially as we lap the sale of our logistics businesses, better aligns with our goal of striking an optimal balance between growth and operational leverage to deliver improving profitability. This includes the increased marketing spend to support our enterprise efforts that I mentioned. Higher year-over-year compensation expense is expected to be driven primarily by two items.
Speaker Change: Q3 gross margin is expected to be up approximately 50 basis points from Q2 of 2024, stemming from a higher mix of subscription solutions.
Speaker Change: Turning to operating expenses, we expect our GAAP Q3 operating expenses to be 41 to 42% of revenues, representing a 300 to 400 basis point improvement over Q3 of last year at 45%.
Speaker Change: The largest drivers of our Q3 operating expense growth compared to the prior year are marketing and compensation expenses.
Speaker Change: On marketing, we plan to continue spending on opportunities that fall within an average 18-month payback period and opportunities to support our key growth initiatives, including international markets, enterprise, and point of sale.
Speaker Change: This includes the increased marketing spend to support our enterprise efforts that I mentioned earlier.
Unknown Executive: Additionally, while our headcount has remained essentially flat for the past five quarters, in Q3, we do plan to hire some key roles within sales and R&D. Even with these additions, we still expect to end the year with minimal headcount growth compared to the 8,300 employees that we had at the end of 2020. Moving to stock-based compensation, Q3 SBC is expected to be $120 million.
Unknown Executive: On CapEx, note that we will no longer guide to CapEx separately, given that following the sale of logistics, CapEx has averaged over the past four quarters only $4 million, and we do not expect that to change. Finally, on free cash flow for Q3, we expect our free cash flow margin to be similar to Q2 of 2024. Over each of the past 5 quarters, we have delivered top line growth excluding logistics of 25% or more and positive free cash flow.
Unknown Executive: With our free cash flow margins consistently improving over that time and reaching double digits over the past 4 quarters, we have accomplished this growth while keeping our team size steady, and we have achieved these margins even as we ramped up investment.
Unknown Executive: With that, I'll now turn the call back over to Carrie for your questions. We will now open the call for your questions. Please use the raise hand feature in zoom to ask your question. If you are dialing in by phone, you will need to press star nine to join the queue and star.
Unknown Executive: We will now open the call to your questions. Please use the raise hand feature in zoom to ask your question. If you are dialing in by phone, you will need to press star nine to join the queue and star six to unmute yourself. We ask that you limit yourself to one question so we can try to get to as many questions as possible. Our first question comes from Bhavin Shah at Deutsche.
Bob <unk>: Any questions as possible. Our first question comes from Bob <unk> at Deutsche Bank.
Speaker Change: Great. Thanks for taking my question, Jeff just on the MRO growth is really impressive in the quarter and it looks like a lot of the strength came from from merchant ads can you just maybe elaborate on where youre seeing a lot of that success or what type of merchants are now bringing to the platform and how much of it is a function of the marketing spend that you've seen.
Speaker Change: Kind of bear fruit.
Speaker Change: Yeah, we're seeing a lot of strength in terms of the types of merchants that we're bringing on board and it's really the full spectrum and so it's been very strong has been very impressive in terms of what we're seeing is a combination as you point out some of it it's the marketing and some of it too is also the paid trials, but I think in terms of shortly to pay trials, but I think the key message for US is we're seeing.
Unknown Executive: Yeah, we're seeing a lot of strength in terms of the types of merchants that we're bringing on board. And it's really the full spectrum.
Speaker Change: Strength in terms of merchant additions across the board, it's been very very healthy. So it's a it's been very very well received and I don't think theres any particular <unk>.
Spot to call out other than in general it's.
Unknown Executive: And so it's been very strong, it's been very impressive in terms of what we're seeing. And it is a combination, as you point out, some of it is marketing, and some of it, too, is also paid trials. But I think in terms of shortening the paid trials, but the key message for us is, we're seeing strength in terms of merchant additions across the board. It's been very, very healthy.
Speaker Change: All geographies in all sizes really in terms of merchants.
Bonnie: Thanks Bonnie.
Unknown Executive: So it's been very, very well received. And I don't think there's any particular spot to call out other than, in general, it's all geographies and all sizes, really, in terms of market Thanks, Bhavin. Our next question will come from Ken Wong at Oppenheimer.
Bonnie: Our next question will come from Ken Wong at Oppenheimer.
Speaker Change: Are you there Ken.
Amin: Sorry on as Amin can you hear me.
Unknown Executive: Yeah, I think on attached rate, in terms of the overall perspective, I'd go back to a lot of the things I talked about on Investor Day in terms of the general things which are helping to drive up attached rates and some of the things which, in general, are headwinds to attached rates. We do feel strongly that this will continue to move in the right direction, given all the things we're seeing in terms of increased payments penetration, in terms of adoption of new products, in terms of pricing, all those things are helping drive attached rates.
Unknown Executive: We will, as we do more in Europe, some of those attached rates will be a little bit lower. As we do more with some high volume merchants, much larger enterprises, some of that will be a headwind for attached rates.
Unknown Executive: But while there may be some variability quarter to quarter, this still is a metric for us, which continues to go in the right direction. I would say, though, and I talked about this a little bit on the earnings call, this is an output for us. It's not an input. As we think about how we run our business on a daily basis, we obviously want to have our merchants take more and more of our solutions.
Unknown Executive: But this is not a metric where we track and say, how do we drive up the attached rate? We're trying to drive as much value to merchants as we can, and that will be reflected in the attached rate.
Unknown Executive: Right. All right. Our next question will come from Brad Sills at Bank of America. Brad. Great. Thank you so much. Can you hear me? Okay.
Unknown Executive: Thank you. Yeah, data. We obviously want to get the most bang for the buck out of every single campaign. And when we know that we can get a higher return by moving it slightly by, you know, either a couple weeks or a couple months, we're always going to take that. So it was just data. It was only one campaign.
Unknown Executive: I wouldn't read too much beyond that, other than, you know, we care a lot about optimizing every single dollar we spend on marketing. In terms of enterprise, we are gaining traction. It's working really well.
Unknown Executive: Marketing is really doing well there. Going-to-market is doing well there. And we're seeing these, you know, these big brands, some of our established brands I mentioned, like Toys R Us, for example, or Barnes & Nobel or QVC. But also, a lot of the first-gen direct-to-consumer companies that have historically built their own stacks in-house are now coming to Shopify. And the enterprise, in terms of the product mix that we offer, there's something for everyone now; we have headless with hydrogen, if you want one size fits all, we have Shopify Plus. And, of course, if you want to pick and choose something like checkout, or shop, shop pay, we have CCS.
Unknown Executive: And so the fact that I think we're offering something for everyone is very compelling. At the same time, I think the go-to-market transformation is really, we've built this disciplined playbook to drive up market presence, and the momentum just keeps growing. We're getting much better at not only getting to the table in these negotiations but also winning these deals. And there is a little bit of, you know, like, a momentum thing here, whereby the more larger brands come to us, the more other brands want to know why they're not on Shopify.
Unknown Executive: The key for us, though, is the value of the enterprise offering is leaps and bounds ahead of everyone else in the market, the speed, agility, the flexibility, the fact that things like Shopify Pay have a conversion rate of like something like 36%, relative to our competitors and 15% better, on average. It's becoming a competitive disadvantage to not be using Shopify Enterprise. And, And that's all working really, really well.
Unknown Executive: We're also obviously working on larger partnerships. I mentioned what we're doing with Oracle; larger agencies are effectively building their entire enterprise e-commerce practice around Shopify's enterprise offering. So all these things are working in unison. And the results of it are that, you know, whether it's your favorite brands, like Gymshark, Viore, Brooklinen, or Mattel, or Supreme, who are already on Shopify and staying with us for the long run, or new companies that are coming on, you know, Vince Camuto and Tops and companies like that. These efforts are producing results.
Unknown Executive: Thank you, Gabriela. Our next question comes from Craig Maurer at Financial Technology Partners. Morning. Thanks for taking the question. I wanted to ask about
Unknown Executive: Thank you, Gabriela. Our next question comes from Craig Maurer at Financial Technology Partners.
Ken Wong: How should we think about the yield in that business changing over time as you push upmarket into enterprise while also expanding internationally and how those two factors play against what's already established? Thanks.
Unknown Executive: It's to be clear on the larger enterprise side, we're seeing expansion in enterprise and high volume merchants adopting Shopify payments. We're also seeing our offline business, which, you know, we primarily monetize their payments grow as well. So, you know, it was historically true that some of the larger brands and merchants that were migrating to us didn't necessarily always take Shopify payments as they came with their own. But that's happening less and less.
Speaker Change: didn't necessarily always take Shopify payments I mean they came with their own That's happening less and less I mean this quarter alone, you know, Rove, Tonal, SodaStream, AthleticGreens, these were merchants that were already on Shopify but now have adopted Shopify payments more recently So I think you're seeing more of that The other thing is, remember that with things like, you know, ShopPay, ShopPay Installments, Shopify Balance, the audiences product, these are all incredible features and functionally the platform that require you to be on payments and so
Unknown Executive: I mean, this quarter alone, you know, Rove, Tonal, SodaStream, Athletic Greens, these were merchants that were already on Shopify but have now adopted Shopify payments more recently. So I think you're seeing more of that. The other thing is, remember that with things like, you know, ShopPay, ShopPay installments, Shopify balance, the audiences product, these are all incredible features and functionality on the platform that require you to be on payments. And so, you know, I think you're going to continue to see healthy penetration across merchant type, region, and channel. Jeff, I don't know if you have anything else to add to that one. Yeah, yeah, the two things I'd
Speaker Change: But that brings, even though the margins on that are a little bit lower than some of our other merchant solutions,
Unknown Executive: Thank you for your question. Our next question will come from Keith Weiss at Morgan Stanley.
Unknown Executive: Yeah, Keith, from our vantage point, the quarter was pretty consistent in terms of what we've seen. I do know that there are a lot of people out there talking about softening consumer spend, and we hear that too. But, I think for us, the key point is that we are working with our merchants to help them be very successful in this environment. We didn't see any significant deterioration or improvement throughout the quarter.
Speaker Change: Thank you for your question. Our next question will come from Keith Weiss at Morgan Stanley .
Unknown Executive: On the last call, we talked a little bit about, from a European perspective, what we might see in terms of FX headwinds. And we talked a little bit about what we saw in terms of consumer spend. It played out essentially exactly as we expected going into the quarter.
Speaker Change: Yeah, Keith, from our vantage point, the quarter was pretty consistent in terms of what we've seen. I do know that there are a lot of people out there talking about softening consumer spend, and we hear that too. I think for us, the key point is we are working with our merchants to help them be very successful in this environment. We didn't see any significant deterioration or improvement throughout the quarter. On the last call, we talked a little bit about, from a European perspective, what we may see in terms of FX headwinds, and we talked a little bit about what we saw in terms of consumer spend.
Unknown Executive: So I recognize and hear the commentary from others out there in terms of what they're seeing. I just think we're, from our vantage point, we're not seeing the data in terms of our merchants having issues. I think we're just simply taking a share, I think is the best way to say it.
Speaker Change: It played out essentially exactly as we expected going into the quarter. So, I recognize and hear the commentary from others out there in terms of what they're seeing. I just think we're, from our vantage point, we're not seeing it in the data in terms of our merchants having issues. We're, I think we're just...
Unknown Executive: The only thing I'll add to that, Keith, is, you know, keep in mind that we have a very diverse set of verticals and merchants across geos and merchant types. You think about, like, we have scrubs from Figs and we have pet products from BarkBox and razors from Flamingo. We have Nestle and Heinz and Mattel and Staples. So the wonderful part of our business model is it's not relying on one particular type of merchant in one particular geography.
Keith Weiss: The only thing I'll add to that, Keith, is, you know, keep in mind, we have a very diverse set of verticals and merchants across geos and merchant types. You think about, like, you know, we have scrubs from figs, we have pet products from BarkBox and razors from Flamingo, we have Nestle and Heinz and Mattel and Staples. So, the wonderful part of our business model is it's not relying on one particular type of merchant in one particular geography. We have merchants coming to us for B2B and merchants that are going direct to consumer in one particular geography. We also have, you know, massive multinationals that are using us to sell to get in front of their consumers as well. And so, I think that our merchants do seem to be, you know, outperforming and doing better than others. And I think a big part of the reason that we are not seeing the same thing that others might is because we simply have merchants across a ton of verticals and across a ton of geos.
Unknown Executive: We have merchants coming to us for B2B and merchants that are doing direct-to-consumer in one particular geography. We also have, you know, massive multinationals that are using us to sell to get in front of their consumers as well. And so I think that our merchants do seem to be, you know, outperforming and doing better than others. And I think a big part of the reason that we are not seeing the same things that others might is because we simply have merchants across a ton of verticals and across a ton of geos. Thank you for your question, Keith. Our next question will come from Paul Treiber at RBC. Oh, thanks very much. And good morning. You're seeing very good success after the changes that you've made.
Unknown Executive: Thank you for your question, Keith. Our next question will come from Paul Treiber at RBC Capital.
Unknown Executive: Yeah, from my vantage point, we've obviously talked about the 18 month payback as a guardrail that we use here. Paul, I think from our vantage point, and Harley alluded to this in terms of how we're using data to be really thoughtful in the returns we're seeing. And we continue to think about it that way.
Speaker Change: Oh, thanks very much. And good morning. You're seeing very good success after the changes that you've made in performance marketing. The question is, is why is the 12 month payback
Unknown Executive: Yes, we could adjust our paybacks. But this is something that we, I mean, for years, we've been very mindful in terms of how we're using data, how we're using feedback loops, how we're using the technology internally that we built to look at marketing, to figure out what the right payback periods are, where we allocate our dollars, how we support our emerging products like enterprise and international point of sale, all those things.
Speaker Change: vantage point, and Harley alluded to this, in terms of how we're using data to be really thoughtful in the returns we're seeing. And we continue to think about it that way. Yes, we could adjust our paybacks.
Speaker Change: For years, we've been very mindful in terms of how we're using data, how we're using feedback loops, how we're using the technology internally that we built to look at marketing, to figure out what the right payback periods are, where we allocate our dollars, how we support our emerging products like enterprise and international.
Unknown Executive: So I hear you that, in theory, we could shorten it even more. But I alluded to in one of the questions earlier, in some of the movements in MRR, some of that has been the shortening of the paid trials, but some of that is already from some of the success we're seeing in terms of adding new merchants on the platform as a function of what we're doing on the marketing side. So from our vantage point, this feels like the right move. I'd also say
Unknown Executive: I'd also say that, you know, ultimately, what we care about from a marketing perspective is where can we push the envelope? How do we maximize returns? And how do we stay ahead of competition and ahead of the curve? We are really confident in this incredibly powerful, low latency marketing platform that we've built here. And we've optimized it around this 18 month guardrail. Now, that being said, there are some longer payback periods for things like enterprise, for example, whereby we begin to talk to a merchant, they may not only, they may not launch for, you know, a year or two afterwards.
Speaker Change: I'd also say that, you know, ultimately what we care about from a marketing perspective is where can we push the envelope, how do we maximize returns, and how do we stay ahead of competition and ahead of the curve.
Unknown Executive: We think by having this guardrail and then very specifically targeting the channels and marketing that we think are going to have an outsized return, and then pivoting our spend based on that data, that allows us to keep testing, keep experimenting, but ultimately stay very disciplined in achieving and unlocking as many opportunities as we can. But that 18 month average payback period is a really good guardrail for us because it holds everyone here accountable for delivering the highest bang for the buck.
Speaker Change: are offering the highest bang for buck.
Unknown Executive: Thank you for your question. The next question will come from Tim Chiodo at UBS.
Unknown Executive: Thank you for your question. Our next question will come from Tim Chiodo at UBS. Kim, are you there? I am hot.
Speaker Change: Thank you for your question. Our next question will come from Tim Chiodo at UBS.
Kim: Kim, are you there?
Tim Chiodo: I am. Hi. Good morning. Thank you for taking the question.
Tim Chiodo: how large shop app is in terms of your overall GMB mix and then maybe within that
Unknown Executive: Thanks a lot. Yeah. So, you know, as you alluded to in Q4, we talked about how ShopApp has nearly reached about $100 million in GMV in a single month. We also talked about how over 70% of Shopify's online checkouts in the past year were made via phones or other small devices. So obviously, we know that the consumers that buy from merchants use Shopify, like ShopApp, and this is how they prefer to do it.
Tim Chiodo: How much of that volume is benefiting from shop campaigns? Thanks a lot.
Tim Chiodo: Yeah.
Speaker Change: So, you know, as you alluded to in Q4, we talked that ShopApp has nearly reached about $100 million in GMV in a single month. We also talked about, you know, over 70% of Shopify's online checkouts in the past year were made via phones or other small devices. So obviously, we know that the consumers that buy from the merchants use Shopify, like ShopApp, and this is how they prefer to do it. But ShopApp is this incredibly owned first party channel for merchants, and we know it helps them drive traffic. What was so interesting and neat about the shop week was that.
Unknown Executive: But ShopApp is this incredibly owned first party channel for merchants, and we know it helps them drive traffic. What was so interesting and neat about the Shop Week was that merchants have been using the Shop App for a while, but the fact that 10,000 merchants on their own posted their best GMV week ever on the Shop App allowed us to reintroduce the power of this incredible app and this tool to them as a main channel.
Unknown Executive: So we'll continue to do that. We're unleashing new ways for merchants to engage and to drive these incredible connections. Also, we think that from an advertising perspective, I mean, you mentioned shop campaigns. These are ways that we can also help merchants not only find new buyers but also increase their lifetime value or the sales and the checkout rates they have with those buyers. And so, you know, we're seeing brands like Feastables and Steve Madden and Spanx now who consistently come back to us to do this marketing, specifically on the Shop app, using ShopCast with their audiences and those that use it. Their GMV grows, and they grow their user base, and they keep coming back.
Speaker Change: These are ways that we can also help merchants.
Speaker Change: base, their GMV grows and they grow their user base. They keep coming back. No new data to give out just yet on the shop app, but you can, I mean, if you're watching things like our edition release we did this summer and you're just, you know, looking at the tea leaves here, you see the shot up continuously gets better in time, both for consumers, but also from a merchant perspective as this incredible channel for them to drive new traffic. And again, that is one more thing that if you want to leverage that, you want to utilize that as a merchant, you have to be on Shopify.
Unknown Executive: No new data to give out just yet on the Shop app, but you can, I mean, if you're watching things like our edition release we did this summer, and you're just, you know, looking at the tea leaves here, you see the shot of continuously gets better over time, both for consumers, but also from a merchant perspective, as this incredible channel for them to drive new traffic. And again, that is one more thing that if you want to leverage that, you want to utilize that as a merchant, you have to be on ShopCast. Thank you for your question. Our next question comes from Tyler Radke at Citi Investments.
Speaker Change: Thank you for your question. Our next question comes from Tyler Radke at Citi Investment.
Unknown Executive: There we go. Can you hear me?
Tyler Radke: There we go. Can you hear me okay?
Unknown Executive: Okay. Yeah. Awesome, thanks so much for taking the question. A question on just how to kind of unpack the third quarter revenue guidance, obviously, you talked about some of the MRR moving pieces in Q2, but I'm just curious how we should be thinking about the growth of MRR in the second half of the year, just given what you're seeing in terms of, you know, the pricing actions on the plus queue.
Tyler Radke: some of the MRR moving pieces in Q2, but I'm just curious how we should be thinking about the growth of MRR in the second half of the year, just given what you're seeing in terms of.
Unknown Executive: And then there is the thought that we should still expect all these performance marketing investments to be an accelerant or an incremental kind of revenue uplift into 2025. Just give us your latest thoughts in terms of the timing of when you see those paybacks and incremental revenue streams coming into the model. Thank you.
Speaker Change: You know the the pricing actions on the on the plus skew and then is the thought that still we should expect
Unknown Executive: Yeah, Tyler, a lot in there, but let me pull it apart from a couple of different pieces, maybe in reverse order. I mean, as we think about the marketing spend, we do, based on the 18-month average payback periods, think about this as something that drives 2025 more than it does 2024. I did talk, though, before on one of the earlier questions about the impact on MRR in Q2 of the strong uplift in MRR, in particular in a couple of pieces, and some of that was a shortening of the paid trials, and so that will be this quarter.
Unknown Executive: That's not a dynamic you would see next quarter, but some of that is some of the merchants joining the platform, the acquisition engine working, and a big piece of that is marketing. So, we do think we've had a lot of success, and Q2 was particularly strong in terms of getting more merchants on the platform. I'm not obviously going to comment in terms of what that means for Q4.
Speaker Change: And some of that was a shortening of the paid trials, and so that will be this quarter, that's not a dynamic you would see next quarter, but some of that is some of the merchants joining the platform, the acquisition engine working, and a big piece of that is marketing. So, we do think we've had a lot of success, and Q2 was particularly strong in terms of getting more platform.
Speaker Change: I'm not obviously going to comment in terms of what that means for Q4. I've given you guidance for Q3 in terms of the revenue growth. I think when you look at the revenue growth over the past...
Unknown Executive: I've given you guidance for Q3 in terms of revenue growth. I think when you look at revenue growth over the past, and this is reflective in the Q3 guidance, so when you look at revenue growth over the past four to six quarters, you do it on a pro forma basis, ex logistics, and you think about some other things around pricing changes that maybe had an impact on that. Without pulling this apart too much, I think you've seen some very consistent, stable delivery of revenue growth.
Speaker Change: and this is reflective in the Q3 guidance when you look at the revenue growth over the past
Unknown Executive: And that's what's reflected in the Q3 numbers. So I mentioned to Keith earlier some of the dynamics we're seeing from a macro perspective, that's folded in there too. But we feel really good about where we are in terms of adding more merchants to the platform. And I think, as you know, MRR is, I guess the other piece to this too, the pricing changes and some of the things in marketing.
Speaker Change: But we feel really good about where we are in terms of adding more merchants to the platform.
Speaker Change: And as you know, MRR, I guess the other piece to this too, is the pricing changes and some of the things in the marketing. Obviously, from a pricing change perspective,
Unknown Executive: Obviously, from a pricing change perspective, the standard pricing change, of course, is well reflected in there. The plus pricing change is reflected in MRR. They will be a little bit more incremental as you think about Q3 revenues because, obviously, that was done mid-quarter, so that's not fully captured in the quarter. But it's a tailwind that we see in terms of getting to the revenue guidance that we gave. Our business is simply performing well, and that's reflected in the numbers yourself. Thank you for your question. And our final question will come from Richard Hsu at the National Bank.
Speaker Change: mid-quarter, so that's not fully captured in the quarter, but it's a tailwinds that we see in terms of getting to the revenue guidance that we gave. Our business is simply performing well and that's reflected in the numbers you saw.
Unknown Executive: Two sides. One is that there are a lot of incumbent legacy systems that, frankly, are not very good that a lot of retailers have. And it is high time that they look for a better solution that's future-proof, that has far more functionality, that is way more of a delight to use for both their staff and also the consumers that use it. And then, of course, one of the best parts of Shopify's business model is that we also create and help to sort of incubate what will be the hottest brands tomorrow.
Speaker Change: Two sides. One is there's a lot of
Speaker Change: Incumbent legacy systems that, frankly, are not very good, that a lot of retailers have, and it is high time that they look for a better solution that's feature-proof, that has far more functionality, that is way more, you know, of a delight to use for both their staff, but also the consumers that use it, and then, of course, you know, there are one of the best parts of Shopify's business model is that we also create and help to sort of incubate, you know, what will be the hottest brands tomorrow, and as they open up more,
Unknown Executive: And as they open up more, you know, more stores, or they enter the physical retail space, they will bring Shopify with them. The reason I mentioned brands like Mejuri, for example, is that Mejuri has had a lot of stores for a very long time.
Speaker Change: more stores or they enter the physical retail space, they will bring Shopify with them. The reason I mentioned brands like Mejuri, for example, is Mejuri has had a lot of stores for a very long time. And the fact that they're replacing their existing systems with ours, both online and offline is indicative of what we're seeing. But we are winning larger merchants, we're winning merchants now with over 100 locations, physical locations across many regions. We now have launched Point of Sale Terminal in eight additional countries across the EU and APAC.
Unknown Executive: And the fact that they're replacing their existing systems with ours, both online and offline, is indicative of what we're seeing. But we are winning larger merchants; we are winning merchants now with over 100 locations, physical locations across many regions. We now have launched Point of Sale Terminal in eight additional countries across the EU and APAC. We're also finding it to be a very compelling pitch to say that there's no reason for you to have separate systems running online and offline that are completely disconnected but rather, centralizing all your business into one single place, which is this unified commerce system that Shopify provides, is really helpful. And then, obviously, the results speak for themselves.
Speaker Change: We're also finding it to be a very compelling...
Speaker Change: pitch to say that there's no reason for you to have separate systems running online and offline that are completely disconnected, but rather centralizing all your business into one single place, which is this unified commerce system that Shopify provides is really helpful. And then, you know, obviously the results speak for themselves. I mean, Q2 GMV growth of 27% from offline.
Unknown Executive: I mean, Q2 GMV growth of 27% from offline. And we expect it will be a key driver for us, not just this year, but certainly in the future. And then, you know, we'll continue to get brands like Frank and Oak, for example, and Cherry Republic and Banana Republic Home. And these really amazing brands that have tons of locations that are now using us are also becoming wonderful sort of force multipliers to get other brands and other retailers like them. So it's a really important part of our business, and it's growing really well.
Harley Finkelstein: Alright, thank you for that question. I'll now turn it back to Harley for closing comments.
Speaker Change: Thank you for that question. I'll now turn it back to Harley for closing comments. Yeah, just a quick word before we close. I wanted to, you know, I wanted to say a couple things here because I think it's really important, particularly right now.
Harley Finkelstein: Yeah, just a quick word before we close. I wanted to, you know, I wanted to say a couple things here because I think it's really important, particularly right now. Those of you that have been following the company for, you know, since the IPO and, hopefully, well before that, we've always been a company that builds for the long term. And I think what you are seeing today is that we are seizing these opportunities and making investments to further establish ourselves as a leader in commerce.
Harley: Those of you that have been following the company for, you know, since since the IPO and hopefully well before that, we've always been a company that builds for the long term. And I think what you are seeing today is that we are seizing these opportunities and making investments to further establish ourselves as the leader in commerce.
Harley Finkelstein: We are executing on the plan that we laid out for all of you last year, and you're seeing it in our results. But I think these results in particular demonstrate an important trend, which is that we can achieve a seriously meaningful combination of both growth and profitability. And we continue to invest in areas that we think will be incredibly meaningful in the future. You're hopefully seeing this. If you're not, you know, please do a double double double click on this.
Speaker Change: You're hopefully seeing this. If you're not, you know, please do a double double double click on this, but we are building the most impactful products on the planet for merchants and businesses of every size. And I know I've said this a few times on this call, but I'm going to say it again. This is by far the best version of Shopify. And thank you for joining us on this call.
Harley Finkelstein: But we are building the most impactful products on the planet for merchants and businesses of every size. And, and I know I've said this a few times on this call, but I'm going to say it again: This is by far the best version of Shopify. And thank you for joining us on this call.
Unknown Executive: That concludes our call. Thank you.
Speaker Change: That concludes our call. Thank you.